Betting on Hunger: Is Financial Speculation to Blame for High Food Prices?

Food prices have been on the rise since 2007, thanks in part to bad weather and increasing demand from biofuels and developing nations. But there's one cause that hasn't gotten much attention: financial speculation in crop markets. Are bankers artificially inflating the price of food?

Remember the food crisis of 2007 and 2008, when rapid and extreme increases in global food prices led to riots and civil unrest in 28 countries? While we have yet to see unrest on the same level since, the shadow of that crisis, and the debate as to what the systemic causes were, remains. At the end of November, the World Bank warned in its Food Price Watch report that high and volatile prices are the “new normal.” In a world where nearly 1 billion people live in hunger — an estimate that Jomo Sundaram, assistant director general of the U.N. Food and Agriculture Organization (FAO), describes as conservative — high food prices can be fatal.

The shift in prices affects consumers in rich countries, who will see their grocery bills rise at a time when wages in much of the world are stagnant. But the real impact is felt by the global poor, in places like Tajikistan, where individuals spend nearly 80% of their income on food. Price spikes in those places can be devastating, even deadly. Prices of agricultural commodities are now 7% higher than a year ago. Wheat and grain prices are especially high, with the former heavily impacted by crop failure in the U.S., Russia and other regions.

There are obvious factors at play here: poor weather, including drought in the U.S. Corn Belt, as well as the growing demand for grain from the biofuel industry and from consumers in places like India and China who are transitioning to a more meat-heavy diet. (It takes more than 15 lb. of grain to produce 1 lb. of beef.) For an increasing number of experts however, these factors do not go far enough in explaining what has caused food prices to spike since the 2000s, reversing what had been a four-decade-long trend of declining prices.

Not everyone agrees that it is that simple. Ann Berg, a former trader on the Chicago Mercantile Exchange and now an adviser to the FAO, says that while this trend has been noted, you “cannot prove causality” between the role of these speculators and the artificially high prices.

Traders have always speculated on the agricultural-commodities futures market, just as they do in other commodities like copper or oil. Those with an actual commercial interest — food producers and buyers — use this market to bet against price increases and decreases as a form of insurance against volatility. But after 1999 and 2000, when sections of the Glass-Steagall Act were repealed and President Bill Clinton signed the Commodity Futures Modernization Act into law, investment banks and other financial actors began to bet on commodities as speculation, not as insurance. “Where we used to see something like 12% of the market made up of financial players, since deregulation, this number has now jumped to over 60%,” says Heidi Chow of the World Development Movement, a U.K.-based campaigning organization.

These facts alone do not necessarily implicate speculators as the boogiemen responsible for food price volatility, though the perception of financiers gambling and profiting as millions starve is a powerful one. Over the summer some European banks tentatively pulled out of these markets, either by withdrawing vehicles that allow investors to speculate on food commodities or by promising to not introduce new ones. Similarly, Rich Ricci, chief executive of Barclays’ investment arm, hinted before a U.K. government committee on Nov. 29 that his bank would consider ceasing to trade in agricultural products because “it does not sit socially well with a large constituent of our customers.” According to the World Development Movement, Barclays Capital made nearly $548 million from agricultural speculation in 2010.

Campaigners and regulators are nevertheless keen to introduce caps and limits on food speculation. As Brett Scott, a former London broker, explains, while it is difficult to pin the blame on speculation, which has always played a role in providing needed liquidity to markets, the volatility of these commodities has attracted a significant number of technical traders who “speculate on market patterns formed by the actions of other traders.” It’s their role that is key to understanding how the market has almost short-circuited, disconnecting from the realities of supply and demand and causing havoc, misery and high prices for both producers and consumers.

For regulators, the difficulty is in establishing how much speculation is too much. Speaking before the FAO in Rome in October, Bart Chilton of the U.S. Commodity Futures Trading Commission (CFTC), who is pushing for regulatory caps through position limits, posed this very question to the audience: “By a show of hands, if one trader controlled 85% of a market, could they manipulate prices?” He received an almost blank response, according to Ann Berg. She points out that there is no working definition of what excessive speculation is, though there is a growing concern about the ability of these investment funds to “move markets,” as Chilton put it.

A possible solution to curbing these investors’ impact on real-world prices has been written into the Dodd-Frank legislation, authorizing the CFTC to set limits on percentages of specific commodity products that can be held by a single entity. Michael Dunn, a former CFTC commissioner, expressed doubts about these limits, describing them as “a cure for a disease that does not exist, or at worst, a placebo for one that does.” His pronouncement is yet to be tested; in October, Judge Robert Wilkins of the Washington, D.C., district court struck down this rule. For its part, the CFTC plans on appealing his decision. It may be the case that by the time regulation is in place, investors have lost their interest in commodity speculation, if only because of the poor optics for banks. For the world’s starving, however, this may be too little, too late.

An earlier version of this article incorrectly stated that President George W. Bush introduced the Commodity Futures Modernization Act. It was introduced during President Bill Clinton’s term.

Agricultural commodities may have started as protection for food producers, but they no longer function that way. Consider the pork belly market – it shut down last year after 50 years of trade because advances in technology (related to farming, refrigeration, etc.) meant that there was no longer sufficient volatility in the market for traders to profit on the spreads. The markets are about trading volume, not about supporting farming industries.

Looking forward, the impact on real-world prices is only likely to grow, since markets are becoming more consolidated and more global in scope. We had regional grain-trading operations 100 years ago, with more limited impact on real-world pricing – but those days are gone. When grain prices go up, that impact now resounds around the world.

Here’s a radical idea: if we want to get serious about harnessing the power of the commodities markets to help feed the hungry, how about designating even a fraction of the profits from trading to organizations that help feed people in need?

--Kara Newman, author, The Secret Financial Life of Food: from commodities markets to supermarkets (Columbia University Press)

Great story, and timely topic. Consumers have so much power when they "vote with their dollar." Don't buy your meat at the grocery store -- buy your meat from the real heroes, family farmers. We get all of our meat (including pasture-raised pork) from Pasture Prime Family Farm. They ship nationwide, and they never use antibiotics, hormones, or feed GMO products. Their pigs are truly out in the open, living as nature intended.

Written by someone little understanding of economics, markets or speculators. If you accept the premise that prices were pushed up purely by speculators, then you would expect an equal number of speculators to drive prices down by buying puts or selling contracts short. Speculators trade on market inefficiencies; both long and short.

...so punishing the facilitators and market participants with more regulations will solve the problem? Creating more roadblocks in the path of free markets - markets that have efficiently balanced supply and demand for almost 200 years - will solve the problem?

You gotta be kidding me. Bush introduced the CFMA in the late 90's? He was elected in 2000! Commodities deregulation was Clinton -- he has already publicly apologized for the bill (insofar as it effectively prohibited regulation of the OTC derivatives market). C'mon, Time Mag: discover Wikipedia.

An interesting and balanced article. It is astonishing to learn that in Tajikistan 80% of income is spent on food. Living life that much on the edge must not be a pleasent experience, to say the least. I can't help but contrast this to a sort of fun ritual in some North American high schools, that is, a cafeteria food fight. The kids I'm sure would not find it so much fun if they were more senstitized by their instructors on this and other issues not taught in a mainstream cirriculum.

On the other hand and to be fair, global capitalism has lifted more people out of poverty in the last several decades than at any other time in history. The real issue then is awareness and the instillation of just regulatory mechanisms.

@Mercurus Yea the problem is that it's been known that speculators drive up the costs of food dating back to the days of the Code of Hammurabi around 1700 B.C.

For thousands of years commodities speculators were always viewed as the lowest of the low, scum and it''s only been in recent decades with the rise of finance capital and an economy lead by finance that these people have been put up on pedestals as if they are actually doing something new or beneficial to the economy.

@sverry7 In order for Capitalism to work properly, individual rights must be recognized in a culture's law and enforced without passion. Capitalism ISN'T what we have now...and ISN'T what we'll have if government continues to create and enforce arbitrary regulations and laws. Here's the real shocker: 100% of the market regulation we now have is arbitrary. Roughly 90% of the laws we have now are arbitrary.

We can only begin correcting the current problem of food prices by getting rid of all regulations and laws that restrict individual rights and freedoms.

@Mercurus I'm not sure what fictional book you read to have received such information but there are no strict guidelines or book or rules which describes what is or isn't a function of capitalism.Trade has been regulated in the U.S between the states since the days of colonial mercantilismand at the international level with England dating back to the Navigation Acts of the 1650's. Now I'm not saying that it's a good or bad thing but that's reality and many times in the real word there is a vast difference between theory and the practical application of such.

The perfectly rational markets described in the works of Adam Smith in the 1700's do not exist in reality And the fact that you suggest reverting back to economic ideology designed for a completely different era during the Industrial Revolution is indicative of just how little you actually understand how the markets work and have always worked because money isn't value neutral.

@Mercurus@sverry7 And while we're at it, let's abolish the limited liability corporation, which is entirely a creation of government and only serves to insulate the corporate and financial overclass from the personal consequences of their own greed and irresponsibility. Freedom must include the freedom to fail. Why is it we never hear you lihertarian Randist types railing against this sort of government interference with the free market?

Thanks for that libertarian, Ayn Rand stance on the problem. Unfortunately in the real world throwing out nonsense like 90% of the laws in this country are arbitrary doesn't fly. Exactly where'd you get that number from? Rand Paul? Get out of here bud, this article clearly lays out the case for deregulation EXCABERATING the problem, not the other way around. Your earlier assertion that free markets have efficiently worked for over 200 years is cute, unfortunately for you actual history says otherwise. Nations have been closely regulating trade with duties and tariffs since the American Revolution. Better luck next timeMercurus

@BamBizzy Well intended laws have unintended consequences. Hamburgers are cheap and salads are expensive. Why? We subsidize corn. Cattle are fattened by corn at feed lots before slaughter. As a consequence, we have cheap hamburgers at McDonald's but a McD's salad is 5 bucks.